As we enter the Fall Season, it is time to begin thinking about budgets. Given the current dismal economic scene, I am suggesting this year, that owner give as much time to tenant retention and improving operating efficiencies of the properties as they normally would give to new leasing, refinancing and major capital expenditures.
The reason is obvious –not many tenants are expanding or looking to upgrade their space. Capital is scarce and preserving cash flow is paramount. Keeping a tenant in place is often significantly cheaper than replacing the tenant. This will be a very difficult year to growth the top line, so property managers will need to reduce the operating expenses.
Tenant Retention - Talk to the Tenants !!!
From building operations to neighborhood trends to what your competitors are up to, the most useful information about your property often comes from your tenants.
¨ Scrutinize the tenant rent roll for leases expiring in the next 18 – 24 months. These are the tenants most at risk of leaving the building. Start talking to them now.
¨ Inspect the tenants’ spaces to see for yourself what is needed and what additional amenities may appeal to them. While visiting all spaces may not make sense, the expiring tenants and your largest tenants are most vital to your property’s success.
¨ Create a tenant survey to determine what is of importance to the tenants. Do not email the survey, but speak to them and use the time as an opportunity to market your property. Find out from an insider how to improve your property. It’s a good chance your competitors are already talking to them.
¨ Determine who is thinking about staying and who is considering leaving. Strategize about what concessions monetarily or otherwise you will need to make in order to keep them and whether it financially it makes sense to offer them. Is it just free rent or is it freshening up of the space.ust
Inspect the Property
In this current environment, property site and building inspections should be mandatory in order to analyze operating efficiencies and review the building’s appearance. Are the public spaces pleasing to the tenants and their visitors? Does it look like the property is being maintained? Are there any major capital expenditures that can be put off this year?
Analyze the Expenses
¨ Review staffing levels and hours of operations to determine if they are at appropriate levels and determine what you can get away with. Can two part-timers (with minimal benefits) be as efficient as and less expensive than one full timer? Is outsourcing the function more cost effective i.e. security, maintenance? Closing up entrances and reducing the lighting/HVAC at appropriate times are additional ways to save on expenses.
¨ Rebid out all contracts to determine the best cost provider. Determine if a multi-year contract will offer more protection/less expense than a one-year contract Expenses should be reviewed both from a dollar cost perspective and a physical unit expended; how many hours of cleaning, BTU’S of gas burned, light bulbs replaced. . If there is one expense that is unusually high, almost assuredly there is a consultant out there who can assist in your analysis. Many consultants will charge a fee based upon a percent of the savings reduction so there is no direct outlay of funds.
¨ Conduct an energy audit. In years past, single paned windows and incandescent bulbs were telltale signs of energy inefficient properties. Today all aspects of the building envelope are subject to issues of energy efficiency. Converse with local officials and utility companies to see what assistance and incentives they can provide for upgrading your property. Talk to multiple service providers as well i.e.; those that can upgrade your energy management systems. They are often quite informative as they try to sell you their systems and products. Investigate whether there any products that can be installed that will provide a quick payback; i.e.; less than 3 years. Can the building be Leeds certified?
¨ Also, perform a lease audit of key tenants to determine if the tenants are being correctly charged their base rent and expenses. In retail properties this is routinely performed along with a sales audit.
¨ Can expenses be reduced by scales of economy? Insurance is often cheaper if it is bid out as part of a portfolio as opposed to an individual property. Are there any items that can be purchased in bulk as well such as utilities or cleaning supplies?
Review the Performance of the Hired Guns
¨ Review the performance of your leasing team. Have they outperformed the market? Provide you with valuable feedback on the market place? What is an appropriate period of time to judge their performance?
¨ Review the Property management company's performance. Has the property met its budget goals? Is the building well maintained and safe? Are the property managers pro-active with the tenants and do they maintain a good relationship with them? Are they providing quality financial and managerial reports? Do they actively manage the accounts receivable and keep the vendors at bay?
¨ Assess the performance of the Real Estate Tax Consultants. Have they been successful in their tax appeals?
· Review Legal Fees and Accounting Fees – What can be done in-house by the property management team versus hiring the professional?
Stress Test Loan Cash Flow Assumptions
¨ Once the 12 month pro-forma cash flow has been built, stress test the cash flows. Will there be enough money/cash to pay the debt service if the largest tenant leaves or occupancy drops by 10%? What happens if there is no lease up this year or market rent continues to decline? If these tests provide you with negative answers then it is time to start thinking about talking to your lender.
Create a Strategic Plan
Lastly create a strategic plan based upon ownership goals that:
¨ Identifying areas to improve
¨ Implement cost saving measures
¨ Seeks additional sources of revenue
¨ Creating an action plan to maximize NOI and cashflow
¨ Assess the risks embedded in the underlying asset
¨ Forecast cash flows
Real Estate Asset Management Partners
With over 25 years of experience in real estate, we are here to assist you. If you need assistance in creating a strategic plan for your property or reviewing the budgets, please do not hesitate to contact us.
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Real Estate Asset Management Partners 1-201-401-7801
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